Town Square

A few thoughts on restoring the middle class

Original post made
by Tom Cushing, Danville,
on Oct 26, 2011

Last week, I complained that none of the candidates for the highest office in the land are talking about what really ails the country  the steady decline of the middle class, since at least the 1970s. It's a difficult problem, as testified by the flood of two suggestions from the gallery. Both, however, hit on important themes: promoting the native genius for innovation, and reviving the manufacturing sector (although the latter's canard that there's a good trade to be made between environmental protection and industrial vitality just won't fly  indeed that's a 'race to the bottom' in which everyone is guaranteed to lose).

So, step into my revival tent for a threesome of issues that need to be addressed to resuscitate the middle class. The first two are intended to provide direct, immediate assistance to a specific sectors of the economy (manufacturing and construction), whereas the third addresses concerns about where America puts its emphasis for the future. We will return to the tent for more of these fixes, over time.

1  Trade/Currency Adjustment: China, with its mammoth internal market potential and burgeoning export sector has, I believe, artificially undervalued its currency on the world markets. This policy has had the twin effects of making their exports 20-30% cheaper and thus more competitive than they "should" be, and retarding the development of those internal consumption markets that might be targets for American and other manufactured goods. The US should find ways to revalue its currency to counteract the Chinese strategy, as by countervailing duties on Chinese goods, or a general devaluation of the greenback.

I am aware that we risk Hawley-Smoot 2 in slightly more modern clothes, but instead of a general protectionism, this move would be designed to discipline pre-existing currency manipulations by Beijing. Consumers would also pay more for those now-underpriced goods; so be it.

2  Construction and Housing: I am among those who believe that the economy will not recover until housing starts do  there are both construction jobs and all those manufactured goods that go into a new house. The spending power of the middle class has also been truncated by the fact that many, many mortgage holders are continuing to pay pre bubble-burst rates on their real estate that is under water. Strategic default remains an unacceptable option to many, for fear of FICO or eternal damnation. I would force the mortgage holders to value their investments at current market prices, and absorb the losses they should incur in free market conditions  it was, after all, BOTH borrower and lender who "made bad choices." Currently, only one party to those unfortunate transactions is bearing the brunt.

Revaluing would tend to break the log jams currently inflicting the real estate market  and let the losses fall where they belong. Near as I can figure, the banks are currently dribbling houses into the market to suit their own inscrutable purposes  but clearly having nothing whatever to do with the public's interest. Once the market has concluded its bottoming-out, builders can begin to adjust to the new reality in ways that will provide steady jobs and fuel consumer spending.

3  Education: as I wrote last week, America achieved its current pre-eminent position as a nation of builders and doers, not staffers and money changers. I fear we have collectively become too focused on fields like law and finance, and not nearly enough on research (value-builders) and engineering (doers). For example, we've developed a ridiculously sophisticated industry of accountants and lawyers to figure out how to surf a ridiculously complex tax system. As finance has become the master, rather than the servant of industry, it has devised ways to re-pile existing boxes and extract value from them, rather than making more boxes. We need more boxes. As those "staff" functions have drawn-off an increasing number of the future Best-and-Brightest, America's universities have increasingly trained technical folk to work in other parts of the world.

So in addition to a vastly simplified tax structure to free-up all that churning talent (I like Fareed Zakaria's version best), I want to create public scholarship and loan incentives that are targeted to underwrite the study of engineering and science. If "shirt-sleeves to shirt-sleeves in three generations" is still true, as I hope, then many able and ambitious up-and-comers need assistance every year. If that government help serves to direct them into value-adding pursuits (rather than value-counting or value- keeping fields), then the effects will be felt domestically, and off into the future.

Fire away!

Comments

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Posted by Kef
a resident of another community
on Oct 26, 2011 at 2:20 pm

If there are no middle class in America then America is Actually Africa. No health care, no jobs, people still live with parents .. Ohh come on America needs a renaissance befor it became just a name we respect.

Posted by Hal, CDSI Research
a resident of Alamo
on Oct 26, 2011 at 5:40 pm

Dear Tom and Editor,

It was a joy to share your (Tom's) commentary with CDSI members in Asia, Europe and North America today to gain the importance of the USAmerican Middle Class to global economies. Imagine please that our global neighbors who do business with our country fully understand the economic power of our middle class and the absence of economic influence at each end of our economic scale in the United States.

It is the middle class technologists that design and market the results product important to global economic production. It is not the very wealthy of our nation that has purpose in such supply chains or any major corporation that is run by exceptionally-paid CEOs.

Tom, take another look along economic-class boundaries and illustrate the origins and consumption by such classes that create our nation's role in global economics and foster growth in our gross domestic economy.

I truly enjoy your inviting analysis and provocation of thought in our corridor. We so need that consideration.

The only way to save the middle class is to revive manufacturing. But America is becoming less attractive to manufacturers due to costs associated with environmental laws, labor laws, civil rights, etc. We don't have jobs anymore, but we have the higher moral ground!

You want to force banks to take a haircut on their loans? Where are we, Venezuela? You can't just override contracts without consequence. People invest here because they know their money is safe. I wouldn't tinker with that if I were you.

You want to get rid of all tax loopholes? How quaint. Wasn't that the idea behind the 1986 Tax Act? How'd that work out for you? Meanwhile, back here on planet earth, politicians enjoy the power of granting tax favors to the politically connected. You think politicians will give up that power? Good luck with that.

When politicians need money, they tinker in areas of the tax code that no one understands, like LIFO layers and Subpart F income. Keeping the code complicated allows politicians to raise taxes at will without the public understanding it. That's a powerful tool.

Your thoughts on education are not without merit, though likely costly. Where would you come up with the money to pay for it? Don't tell me: "Tax the rich?" Sorry, that money is already earmarked to pay for healthcare reform and the $77 trillion we owe seniors so that Medicare and Social Security don't go bankrupt. There's just not enough private money to confiscate in order to pay for all the goodies Washington dreams up.

To counteract China's manufacturing dominance, you suggest devaluing the dollar. Won't that make most Americans poorer? You obviously aren't a pensioner on a fixed income. Pity the poor suckers foolish enough to have savings accounts. And trade wars are financial suicide. You know that. So why even bring it up?

I thought the plan is the Federal Reserve Bank and Federal government create trillions of dollars out of thin air through quantitative easing, artificially low interest rates, and $1.5 trillion per year of government borrowing. This leads to inflation, causing housing prices to rise so that the majority of U.S. homes are no longer underwater. As prices rise, homes start selling again, construction rebounds, people go back to work in the housing industry--our last bastion of middle class jobs. Isn't that what is happening right now?

Tom: I think you really missed the mark with your plan to fix the economic problems and restore the middle class. The answer is not pushing all of our high school students into traditional colleges with promises of scholarships and loan incentives(i.e. asking again for taxpayers to somehow fund this)I grew up in Indiana, where the public schools realized traditional colleges were not for everyone, so there were programs in the high schools that started teaching students and preparing them for work in the trades, i.e. tool and dye makers, plumbers, electricians, machinist, etc. Instead of rackinig up huge student loans in traditional colleges and spending 4 to 5 years to get a degree in a liberal arts program, only to find there were not many white collar jobs available for this degree, students learned about the trades and more blue collar jobs while in high school, started an internship, and after high school learned a trade and skill, without just going to college with no plan. These people were able to find jobs that allowed them to make enough money to buy a simple home, take care of their family without asking for government assistance, and spend money on goods that contributed to the local economy, keeping the middle class alive and well.

Part of the problem with our economy is the "message" from educators and so-called experts that everyone needs to go to a traditional college, spend years running up huge student loans, only to find a lack of white collar type jobs waiting for them. Those who study enginnering, the sciences, math, comptuter sciene, will find those white collar jobs waiting for them, but the other 99% will find it hard to find a job that allows them to stay afloat and pay off their student loans. The false message that everyone has a "right" and is better off by going to a traditional college is so out of control, that now in California taxpayers are paying for illegal aliens to attend these 4 year colleges, where most of them will end up with degrees that do not lead to a white collar job, only frustration.

I realize you teach at a traditional college, so it is natural that you believe "education" is a right and desire to attend a traditional college is so important that taxpayers should fund this "right". If your goal is really to bring the middle class back, without huge student loans, with actual jobs that contribute to the local economy, without governmental assitance, you should stop preaching your fallacy, and start preaching getting programs in place in the local high schools that teach trades and blue collar jobs, and set proper, realistic goals, to save our middle class.

Posted by Responsible for own family
a resident of San Ramon
on Oct 31, 2011 at 12:40 pm

RWR, you are so right on all you educational points. The over crowding, thus fewer seats, the 'exponential expansion' of college-age kids of the BOOMER mass, and a president who pushes pell grants on every inner-city kid to attend college and then they pile up giant debts for something they'll never use....that's not my problem !!
A black clerk at WalMart said she's attending Cal. I ask, what are you studying? Answer: art ? followed with, I don't college would have served her needs better. We have an abundance of foreigners who want to attend law school....I have heard some admit, to change how we do things here....wait,didn't they come here because America is great ! ??
It's no wonder the costs of seats for our kids have skyrocketed, if available at all....followed with occupiers in the street demanding jobs for all. Some more recent changes to our 'system' have made a mess of our education practices, and college expectations. The ignorance of students taking on massive loans, because they don't know enough math to calculate their futures could be expected.

Posted by Responsible for own family
a resident of San Ramon
on Oct 31, 2011 at 6:58 pm

Our tech companies DO have a reasonable supply of Americans to fill their positions, but the problem is....those companies prefer hiring CHEAPER Hb1 visa workers. Sadly, politicians cave too often on the visas, which hurts OUR US middle-class families.
Our workers can do majority of jobs. However, I can remember when some in my family actually 'gasp' received on-the-job training !! Sorry, many of our CEOs choose to go straight to 'I want more Hb1 workers', natch, they're a lot cheaper ! but killing our people and our economy !!

Posted by billy
a resident of Greenbrook Elementary School
on Jan 12, 2012 at 3:37 pm

The only way to save the middle class is to revive manufacturing. But America is becoming less attractive to manufacturers due to costs associated with environmental laws, labor laws, civil rights, etc. We don't have jobs anymore, but we have the higher moral ground!

You want to force banks to take a haircut on their loans? Where are we, Venezuela? You can't just override contracts without consequence. People invest here because they know their money is safe. I wouldn't tinker with that if I were you.

You want to get rid of all tax loopholes? How quaint. Wasn't that the idea behind the 1986 Tax Act? How'd that work out for you? Meanwhile, back here on planet earth, politicians enjoy the power of granting tax favors to the politically connected. You think politicians will give up that power? Good luck with that.

When politicians need money, they tinker in areas of the tax code that no one understands, like LIFO layers and Subpart F income. Keeping the code complicated allows politicians to raise taxes at will without the public understanding it. That's a powerful tool.

Your thoughts on education are not without merit, though likely costly. Where would you come up with the money to pay for it? Don't tell me: "Tax the rich?" Sorry, that money is already earmarked to pay for healthcare reform and the $77 trillion we owe seniors so that Medicare and Social Security don't go bankrupt. There's just not enough private money to confiscate in order to pay for all the goodies Washington dreams up.

To counteract China's manufacturing dominance, you suggest devaluing the dollar. Won't that make most Americans poorer? You obviously aren't a pensioner on a fixed income. Pity the poor suckers foolish enough to have savings accounts. And trade wars are financial suicide. You know that. So why even bring it up?

I thought the plan is the Federal Reserve Bank and Federal government create trillions of dollars out of thin air through quantitative easing, artificially low interest rates, and $1.5 trillion per year of government borrowing. This leads to inflation, causing housing prices to rise so that the majority of U.S. homes are no longer underwater. As prices rise, homes start selling again, construction rebounds, people go back to work in the housing industry--our last bastion of middle class jobs. Isn't that what is happening right now?

You want to get rid of all tax loopholes? How quaint. Wasn't that the idea behind the 1986 Tax Act? How'd that work out for you? Meanwhile, back here on planet earth, politicians enjoy the power of granting tax favors to the politically connected. You think politicians will give up that power? Good luck with that.

When politicians need money, they tinker in areas of the tax code that no one understands, like LIFO layers and Subpart F income. Keeping the code complicated allows politicians to raise taxes at will without the public understanding it. That's a powerful tool.

Your thoughts on education are not without merit, though likely costly. Where would you come up with the money to pay for it? Don't tell me: "Tax the rich?" Sorry, that money is already earmarked to pay for healthcare reform and the $77 trillion we owe seniors so that Medicare and Social Security don't go bankrupt. There's just not enough private money to confiscate in order to pay for all the goodies Washington dreams up.